Posted by: Josh Lehner | May 23, 2018

Oregon Economic and Revenue Forecast, June 2018

This morning the Oregon Office of Economic Analysis released the latest quarterly economic and revenue forecast. For the full document, slides and forecast data please see our main website. Below is the forecast’s Executive Summary.

The U.S. economy continues to perform well. Economic growth remains above potential and job gains are strong enough to pull down the unemployment rate even as more individuals are looking for a job. The business cycle is not yet waning and the near-term prospects for economic growth are good. The consensus of forecasters peg the probability of recession over the next year at just 15 percent. However, longer-run forecasts remain relatively muted, in part due to the impact of an aging population and the temporary provisions in the federal fiscal stimulus. From today’s relatively strong cyclical vantage point, three real downside risks stand out. First is the Federal Reserve’s ability to engineer a soft landing. Second is the potential for deteriorating international relations and trade. Third is the recent run-up in energy prices which crimp household budgets in the near-term. To date, actual constraints on growth appear to be minimal, but bear watching in a mature expansion.

In Oregon, the outlook remains bright as the economy continues to hit the sweet spot. Wages are rising faster than in the typical state, as are household incomes. That said, growth is slower today than a few years ago as the regional economy transitions down to more sustainable rates. While housing affordability is set to improve due to rising income and more new construction, the impact on household budgets and migration flows makes it a risk. All told, the forecast calls for ongoing growth and there are no real concerns seen in the Oregon data.

Oregon’s General Fund revenues are heavily dependent upon personal income tax collections.  As such, the April peak tax filing season often makes or breaks the state budget. This year’s tax collections came in at a healthy rate, somewhat faster than what was assumed in the March 2018 forecast. If not for the payment of kicker credits from the 2015-17 biennium, Oregon’s growth would have ranked among the top handful of states.

Typically, year-end payments and refunds are the most difficult tax components to forecast. This season refunds will likely end around $150 million short of expectations, while payments closely matched the outlook. However, the biggest surprises came from usually stable sources — quarterly estimated payments and withholdings.

2017 fourth-quarter estimated payments of personal income taxes were up nearly 50% relative to last year, and continued to post strong gains in early 2018. Advanced corporate tax payments have been up sharply in recent months as well, with the first quarter of 2018 coming in 79% larger than last year.  Furthermore, large year-end bonuses are driving withholdings significantly above what recent wage growth alone could explain.

This strong growth across payment types was not unique to Oregon, with many other states reporting even stronger gains. That sort of uniformity is rare, and suggests that tax planning around the federal Tax Cuts and Jobs Act is already affecting the timing of tax collections. Taxpayers rushed to take advantage of expiring breaks, including an uncapped deduction for state and local taxes paid, even as Oregon does not allow the prepayment of state taxes. Some of the recently strong revenue growth will no doubt evaporate going forward.

While changes in the timing of tax payments are already evident, it will take some time before it becomes clear how many taxpayers will change their filing status in light of TCJA provisions.  Some workers could choose to file as businesses.  Some businesses could change from pass-through entities into C-Corporations, or the other way around. While the exact magnitude of the tax law changes is uncertain, it is sure to be large.  These changes are expected to directly add hundreds of millions of revenue dollars over the next few budget cycles.

Together with healthy economic growth and strong tax collections, law changes have helped push both personal income taxes and corporate income taxes over their kicker thresholds. If this outlook holds true, $555 million in personal income tax kicker credits will be paid out two years from now, and an additional $197 million will be dedicated to spending on K-12 education next biennium.

See our full website for all the forecast details. Our presentation slides for the forecast release to the Legislature are below.

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Posted by: Josh Lehner | May 18, 2018

Fun Friday: Do People Really Downsize?

The question, or the assumption that older households downsize as they age is one that I’ve really struggled with trying to answer. Obviously it makes theoretical sense. As one’s children grow up, you no longer need as much space, and the love/hate relationship with the yard may become more physically taxing. I hear comments along these lines quite frequently. And many urbanists rightfully point out that one of the benefits of the missing middle housing — duplexes, quads, townhomes, etc — is it better allows aging in place. That is it would provide additional housing options within existing neighborhoods so if a household does sell/downsize, they do not have to leave their longtime friends and social networks. They can remain in the same area. An added benefit in this scenario would then be a larger, single family home coming back onto the market for another family to move into. We could adjust, or tailor our housing situation with our actual housing needs. Again, all of that makes sense. But do we actually see households downsize overall, let alone stay in the neighborhood? Turning to the data shows that it it kinda, sorta does happen on a small scale. However the silver tsunami of aging Baby Boomer households means we should see an increase in the absolute number of downsizing households in the coming years, even if they do not represent a large share of the housing market overall.

First, let’s set the stage with the fact that older households are increasingly living in single family homes later in life in recent decades. The chart below comes from some interesting work from Jordan Rappaport, an economist with the Kansas City Fed. As Jordan notes, there are real, positive social and medical reasons for these trends over the years. And while the delay is occurring, many older Americans do move to an apartment (or to a nursing facility) as they enter into their more advanced years.

The question our office keeps coming back to is whether this represents true downsizing, or is it more about physical/medical needs and even end-of-life care? In digging into the data it looks to be mostly the latter and less of the former for most households. In fact, moving rates (either across state lines, or within the state, or within a county) are the lowest for those in their late 50s through their early 70s. There is no real retirement-age bump in migration or moving rates. Those only start to pick up as individuals and households age into their 80s, as seen in the Rappaport work above and in the Oregon work below.

Now, even as moving rates and downsizing are pretty infrequent when measured across the entire population, we do know that it does occur. I call these the Most Interesting Households in the World. They don’t always move, but when they do, they downsize. As seen in the second chart below, the households that move in their 60s, 70s, and 80s are moving into smaller housing units overall. They’re dropping around 2 rooms, which is quite a bit. Now, these are not 2 bedrooms necessarily, but two non-bathroom rooms. Think about how many rooms are in your apartment or house. For the vast majority of us, taking away 2 rooms would represent real downsizing.

The work above focuses on people living on their own (or with family or roommates) and excludes those living in a retirement/nursing home. Census classifies those as group quarters. We typically ignore group quarters (dorms, prisons, hospitals, nursing homes, etc) when talking about household trends and it works most of the time. However nursing homes play an important societal role as we age. Now, even as this complicates the numbers above which ignore moves into group quarters, it is unlikely to represent a major shift in the patterns given that the nursing facilities population is, at most, ~10% of the population.

Finally, it is important to note the distinction between levels and rates. All of the above focuses on migration or moving rates, and shows that not many households actually move, or downsize overall. However, given the large Baby Boomer cohort is essentially in their mid-50s to their mid-70s, there are and will continue to be many more older households across the country and here in Oregon. Even with low moving rates, the fact that there will be considerably more households in their 60s, 70s, and 80s in the coming years means that the overall number of households moving, and downsizing, will increase. In the convoluted chart below I tried to show this for the Salem MSA, based on work I did for local realtors a few months ago.

The light blue bars show the expected change in the number of households in the area over the next 8 years. The largest increases are seen among the 65-74, and 75+ year old households. The vast majority of these households are not new Salem area residents. Rather they are households that already live here, and are simply aging into these age groups. Conversely, many of the 25-44 year old households would be new residents moving into the region, even as local demographics are great.

The dark blue bars take moving rates by age group and looks at how many households are expected to move each year. Given moving rates are highest for young households, we see higher volumes there. However, even with low moving rates, the absolute number of older households who are expected to move is larger today than in the past given the increasing number of older households in general. We should see more downsizing overall due to the aging population, even if the share is not rising over time.

UPDATE: This chart may better show the trend and growth expectations of older households moving. Clearly, such households move at a lower rate than younger households, but given the population forecast, older moves are expected to increase in the coming years.

Bottom Line: Moving rates and downsizing among households in their early retirement years is not very common. In fact it is less common today than in decades past. However, among those that do move in their 60s and 70s, they downsize. Given the large Baby Boomer generation continues to age into their retirement years, the absolute number of such moves is expected to rise, even if it remains a relatively small share of the housing market overall.

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Posted by: Josh Lehner | May 17, 2018

Oregon Beer Production, 2018 (Graph of the Week)

It turns out that not every week is craft beer week. Who knew? But this week, it actually is. So in honor of our value-added manufacturing, declining start-up trend bucking, homegrown Oregon breweries out there, I thought I should update our numbers of Oregon beer production. These figures come from the OLCC beer reports which only cover beer made in Oregon and sold in Oregon. So beer imported into the state from other breweries, and beer made here but exported to other states or countries are not included in these numbers. It also includes all Oregon breweries, regardless of ownership or brewing techniques. The goal here is not to get bogged down into defining what craft beer is. Rather it’s to look at Oregon beer production.

At the last check-in on these numbers we knew that over the past decade or so the number of Oregon breweries had tripled and beer production had doubled. So, for me, the biggest takeaway from this updated look is that start-up breweries, defined here as those that didn’t exist before 2005, now produce more beer made in Oregon and sold in Oregon than the older breweries combined. At this point it is well known that the larger, regional breweries have seen flat to down trends in recent years. You can see that in the national figures and the local numbers as well. However, production trends vary by brewery. Some have experienced massive declines, but most of the declines to date are relatively modest, or in a few cases nonexistent. At least in terms of their Oregon numbers. Right now it’s pretty easy to paint a dark picture for the larger breweries given the overall slowing market, some consolidation among distributors and retail outlets, and a small uptick in failures. Those are real issues. However, overall beer production in Oregon continues to increase, primarily due to the ongoing growth among start-ups, and expansions from a few of the older breweries as well. 

Now, we also know that like a lot of markets, a handful of firms dominate overall sales. The 5 largest breweries in Oregon made 40% of the beer last year. The 20 largest made 75% of the beer. Given the typical brewery in Oregon produced just under 500 barrels of beer, this is not surprising. As such, we know that even a large portion of the start-up growth is due to a few breweries. One-third of the start-up production last year can be tied directly to 10 Barrel, Hop Valley, and Ninkasi. That said, if you take those three breweries out of the start-up numbers, the remaining start-up breweries in Oregon would still produce as much as the state’s legacy breweries.

Finally, it must be noted that we should take these figures will a grain of salt. In recent years a handful of breweries seem to have gone missing from the data. Most are relatively small and will not have much of an impact at these topline numbers. However, Craft Brewers Alliance (aka the makers of Widmer, Redhook, Kona and others) does move the needle since they were, and probably still are the largest brewery in the state. To arrive at these estimates I am pegging CBA’s Oregon beer numbers based on the CBA’s reported growth rates. To the extent that Oregon trends differ from the company’s national trends, then the estimates will over- or underestimate the legacy brewery trends over the last couple of years.

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Posted by: Josh Lehner | May 15, 2018

Economic Headwinds and Tailwinds

This morning I have the privilege of being a part of Portland State’s Northwest Economic Research Center‘s forecast breakfast. NERC, of course, is headed by Tom Potiowsky who used to oversee our office as the state economist for much of the 2000s. In recent years, Tom and his team have created regional economic forecasts in addition to other research and consulting work.

My part of the forecast event is a presentation that focuses on some of the bigger picture issues and risks, or headwinds and tailwinds in the economy. I tried to stay away from some of the short-term supply side constraints we’ve talked about quite a bit in the past year. Instead, I focus on larger, structural issues in the economy that we don’t always get the time to highlight and discuss. Some of these issues are Oregon-specific, even regional-specific, while others are national in scope.  After pulling together the presentation, I did realize that much of this is tucked away or buried deep in our official forecast document. That’s both good news (yay, we included these topics) and bad news (boo, we kind of give them short shrift). So, in the coming weeks I’m going to unpack a few of these topics a bit more.

While we may not cover most of these issues on a regular basis, we have touched on all of them at least once before. For those interested in more, see these links.

Stay tuned for the updates, although most will be after our upcoming economic and revenue forecast release which is next Wednesday, May 23rd.

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Posted by: Josh Lehner | May 9, 2018

Lower-Income Households Not Yet Fleeing Portland Region

Over the past decade the number of lower-income households in the Portland region has fallen by nearly 60,000, or by 15%. Here, we’re defining lower-income to not just be those in poverty, but generally speaking in the bottom 40% or so of the distribution. Conversely, the vast majority of household growth this cycle is among those making $100,000 or more. To the extent that these changes reflect a stronger economy in which household incomes are rising, then this is great news. However, we also know that lower-income households and those on fixed income bear the brunt of the housing affordability crunch. The concern for current residents and for future growth is that some of this drop in lower-income households may be due to folks packing up and leaving the region entirely.

As our office regularly discusses, the concern is that affordability may eventually slow or even choke off migration entirely. That outcome would be terrible for local residents as housing costs rise, it would lead to greater displacement as only higher-income households could afford to move here, and it would potentially lower medium and longer-run economic growth*. These concerns are not just theoretical. We know that lower-income households are moving out of California in greater numbers, and work from BuildZoom’s Issi Romem shows that nationally we are experiencing a sorting across metro areas based on income, educational attainment, and the like.

So what about the Portland region? Here, thankfully, we are not seeing net out-migration among lower-income households. In every year in the past decade more lower-income households have moved into the Portland region than have moved out of the Portland region. Additionally, the gross flows do not seem to be slowing much either. That is the affordability issues do not seem to be deterring folks from moving here in the first place.

Furthermore, when we look around at the reasons why people move away, there doesn’t appear to be much of an increase in those citing housing as the reason. We have to switch to state level data due to availability and sample size issues. However, even as there was an uptick in housing-related moves a few years ago, those have slowed lately and always remained a minority of the reasons people left Oregon overall.

Combined, at least in the data we have available to work with, it does not appear that housing and housing affordability in particular are driving households away from the Portland region, or Oregon more broadly. Overall that is very good news from a societal and an economic (labor force) standpoint. Now, that is not the same thing as saying there is no impact. We know that there is. Displacement is certainly occurring within the Portland region. Lower-income households have been and continue to be pushed toward the edges of the metro region, into east Multnomah County in particular. This is part of the increasing geographic disparities seen across the state. While the added housing supply in the urban core is now holding down rents and raising vacancy rates, this is not yet the case in East Portland, or in Troutdale/Fairview/Wood Village/Gresham based on the latest Multifamily NW apartment report. While these areas have some of the lowest rents in the region, they also have the lowest vacancy rates today.

OK, so if out-migration does not explain the declines seen among lower-income households, what does? I originally had a much larger research project focused just on this question but have shelved that. The end results, via a process of elimination shows that the decline is due to higher household incomes, likely the result of a stronger economy. That may seem a bit tautological, and to certain degree it is.

There are lots of puts and takes when it comes to households, household incomes, household formation and the like. However, in controlling for a lot of these known factors — migration trends, inflation, demographics, headship rates — I found that they largely offset overall. For example, we know headship rates are falling so that would indicate we should have relatively fewer households. However we have more 20- and 30-somethings today meaning we should have relatively more lower-income households as young professionals typically earn less money than more experienced workers. But these two factors are of approximately the same magnitude, but in different directions, thus offsetting each other. Furthermore young adults doubling and tripling up in apartments as opposed to living on their own is not a large enough factor here to explain these differences either. So the end result I am left with is that household incomes are rising as more people have a job and wages increase as well. We obviously know this is happening, but it is also useful to know that these other influences on households are not a significant driver of the overall trends in recent years.

Bottom Line: The housing affordability crunch has caused issues within the Portland region, and across Oregon. Lower-income households are less able to afford the higher rents today. And even as affordability is set to improve in the coming years as incomes rise and rents slow, housing costs are a significantly higher share of household budgets than 5, 10, or 20 years ago. The one silver lining here, from a regional economic perspective, is that households are not packing up and leaving the region entirely. That said, being pushed to the edges of the metro area causes other problems in terms of commutes, transit access and the like.

* Would worsening affordability actually lead to lower growth in the future? This was the topic of conversation among our advisors recently and it’s hard to tell. Theoretically it makes sense. However if you look at California, and the Bay Area, it is difficult to say their growth is suffering. Job growth in California has matched Oregon’s, as has San Francisco’s matched Portland’s. Now, the counterfactual is very likely that California and the Bay Area would be growing faster than they are if not for the affordability problems and lack of supply. This means an alternative to slower growth, would be increased displacement. This has occurred in the Bay Area, where lower- and moderate-income households are pushed out and experience longer commutes and the like. As such it is reasonable to think that could occur in the Portland region as well. Overall economic growth may not be that much slower due to a worsening affordability and supply problem, but distribution of that growth and consequences for lower- and moderate-income households certainly would be worse.

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Posted by: Josh Lehner | May 3, 2018

Rising Home Equity in Perspective

We all know that the combination of growing demand in the face of limited supply has pushed housing costs higher. One side of this coin means eroding affordability for renters, and for those looking to buy. Clearly this has happened and is a big problem, even as affordability is set to improve some in the coming years. The other side of the coin, however, means rising wealth for current homeowners. Home equity is by far the biggest, and at times the only source of wealth for households outside of the top of the income distribution. As such, rising home equity isn’t entirely a bad thing. It’s a problem when appreciation and home equity gains outstrip income growth, leading to greater inequality and the like. In recent months I have seen a handful of reports scroll across Twitter showing home value gains in different metros around the country. It made me wonder just how much housing wealth has been created due to the lack of supply and affordability crunch in recent years.

Unfortunately, while data on home values is plentiful, data on home equity is not. So I have stitched together data from the American Community Survey that shows home values, and the number of homeowners with a mortgage and those without a mortgage, data from the Philly Fed’s consumer panel that shows debt loads for mortgages and home equity lines of credit, and data from the American Housing Survey that shows home values and mortgage situation for households based on how long they have lived in their current residence. The only Oregon geography for which all of these pieces are available is the Portland MSA, and we need all of these pieces to pull together an estimate of home equity.

The big takeaway of course is that we have seen a big rise in home equity in the Portland region in recent years. These gains are significantly larger than any measure of economic growth during this period. This first chart below shows the annual increases in dollar amounts for total home equity, total personal income, and for the region’s GDP. In the past few years, home equity increases have been twice as large as underlying economic growth. In terms of the outlook, the baseline forecast expects home equity gains to slow due to prices rising at a slower pace, and with new homeowners having larger debt loads, thus shifting the composition a little bit. That said, home equity gains have been quite large in recent years and are still expected to match economic growth moving forward.
The housing wealth created this cycle is larger than the gains created during the housing bubble. Some of that is due to inflation (higher prices), some due to relatively lower debt levels (larger down payments, fewer second mortgages and HELOCs), and some due to having a larger population today. However, even when measured as a share of the economy, home equity has now surpassed its previous peak. Keep in mind that land values or home values are significantly higher than this which just measures net wealth (values minus debts).

Now, tying these new estimates back to the aforementioned reports from around the country shows that the typical homeowner in Portland has seen a significant increase in wealth. Over the past 5 years, the median homeowner equity has increased by about $121,000. While these increases may be smaller than those seen in the Bay Area or up in Seattle, these are still quite large. To help put it in perspective somewhat, the next chart shows the annual gain in home equity in the blue bar, and the percentage of households in the region that earned less money than that during the year. Lets take 2016 as an example, albeit an extreme one. In 2016, the typical homeowner saw their home equity rise by $39,000. During the same year, 28% of all Portland area households had incomes of $39,000 or less. The goal here is not to fan the flames of some sort of class warfare. Rather it is to help frame and quantify the discussion surrounding the current housing market. The wealth gains in recent years due to the unbalanced market are big. UPDATE: Equity and wealth are not the same as income. While a homeowner can tap their wealth via a home equity line of credit, it is still not the same as cash flow. To fully realize these gains, an owner has to sell the property.

Another way to show the same sort of thing would be to convert the home equity gains into their hourly wage equivalent (based on an FTE of 2,080 hours). Essentially the housing wealth created this cycle is the equivalent of adding a low-wage job to one’s household income, or in this case wealth. Of course the big difference is, you know, that current homeowners reaped the benefits of the rising market without having to perform any actual work.

Finally, it should be pointed out that the housing wealth created this cycle has been on a narrower base. First, homeownership is lower today, meaning fewer households as a share of all households, have seen these increases. The flip side is that landlords and other property owners have seen a larger share of the gains this cycle.

Second, we know wealth is even more concentrated than income. This goes for the overall distribution, where asset price increases accrue to the top of the distribution, but it also goes for differences seen across various racial and ethnic groups. While the racial wealth gap nationwide is large, and the gap is more complicated than homeownership alone, we know that housing and home equity makes up a large portion of most household’s wealth. Locally we can see that concentration by race and ethnicity as well. 

Bottom Line: The current housing market has created clear winners and losers. As our office tries to highlight as much as possible, one of the biggest risks to the regional outlook is our ability to ensure an adequate housing supply. There are two big reasons why. First, an adequate supply means better affordability, benefiting local residents and their household finances. Second, not enough units will slow migration, increase displacement, and the like. The end result would be to lower our longer-run economic growth prospects if the inflows of young, skilled households dries up.

I’ll have more on migration and housing-related moves next week.

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Posted by: Josh Lehner | April 27, 2018

Young Oregon Economists (Graph of the Week)

Across Oregon, the Bureau of Labor Statistics estimates there are 230 working economists based on the 2016 2017 occupational data. Of course the job title of economist is a limited set. There are nearly 20,000 Oregonians working in analyst positions and many more that involve data, analysis, and the like. However, as I am updating some data on young college migrants, I thought I should look at those with an actual degree in economics. What the latest ACS data shows is that there are about 8,000 young Oregon economists in the state. And in keeping with Oregon’s overall trends, in the typical year we see positive net migration. More young adults with an economics degree move into Oregon than move out of Oregon.

As an aside, when digging into these young college graduates a bit further and looking across all degrees, it shows that those moving out of Corvallis and Eugene are split about 75/25 in terms of moving to somewhere else in Oregon versus those leaving the state entirely. Those with a scientific, technical, or medical degree were a bit more likely to stick around in Oregon than those with other types of degrees. And economics majors were also a little less likely to stay in Oregon, although the sample size is small enough the differences are unlikely to be statistically significant.

Finally, I’d like to give a special shout-out to the Oregonian in the data who has a degree in economics from a business school, and another degree in economics from the social sciences. Not all heroes wear capes.

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Posted by: Josh Lehner | April 24, 2018

Economic Disparities: Geographic, Racial and Ethnic

One of the key talking points our office has been using in recent years is that the economic recovery and expansion is now reaching all corners of the economy. Every region in the state is adding jobs, poverty rates are dropping for all groups, and incomes are rising at all points in the distribution. This doesn’t mean everyone has shared equally, of course. Many economic disparities remain, even as we have turned the corner on all fronts. In presentations, we’d then show a chart or two along these lines.

After a recent presentation, I was asked more about the racial and ethnic trends seen in the data. This equity lens is one our office does not discuss as frequently, at least in part due to our office’s role, in part due to our oversight and in part due to data availability. The CPS, or the monthly household survey, does not really have a big enough sample size here in Oregon to extract (un)employment trends for different racial or ethnic groups in real time, and the CES, or the monthly employer survey, does not contain any information on worker characteristics, just employment by industry. So, I turned to the Census data to compile the following looks at employment rates and household incomes for different racial and ethnic groups here in Oregon. Before 2000, a respondent had to choose a single race or ethnic group. Since 2000, a respondent can choose multiple races or ethnicities. In this analysis, I am using the inclusive definition, where someone saying they are bi-racial is included in the data work for each of the two (or more) races filled out on the Census/ACS survey.

First, let’s take a look at the employment rate for prime working-age Oregonians, or those between the ages of 25 and 54 years old. This calculations shows the share of folks who have a job, and gets away from the unemployment rate or labor force participation rate questions about whether or not someone is actively looking for a job. The first set of charts below shows that for the most part, employment rates for different racial or ethnic groups in Oregon have recovered to where they were prior to the Great Recession, at least through 2016 which is the latest available Census data. Disparities remain, as employment rates for Black Oregonians and American Indian or Alaska Native Oregonians are sizably lower than for the other racial or ethnic groups. However these employment differences do not appear to be widening over the business cycle. Note that the noisy year-to-year movements are more likely about sample size issues for Oregon’s various racial and ethnic groups, than about true economic shifts. That said, the big picture trends are clear and I would focus on those.

In terms of median household incomes, there is a wider range of outcomes than just focusing on employment for prime working-age Oregonians. Here, too, you can see the income disparities across Oregon’s racial and ethnic groups. When it comes to decomposing these disparities, the literature finds that differences in employment rates, educational attainment, employment in different types of occupations, and household composition (number of family members, number of earners, etc) explain much of the differences. However they do not explain all of the differences. Just as it is true with the gender wage gap, there remains an “unmeasurable” component to these income disparities. This “unmeasurable” component is evident in the data and is commonly used to gauge outright discrimination.

Beyond differences seen among Oregon’s racial and ethnic groups, there are other types of economic disparities as well. One type is geographic disparities within a regional economy. When our office looks around the state we tend to focus on a single county, but more commonly on groups of counties. This, of course, masks ground level, or neighborhood level trends and issues. In recent years, Employment’s Christian Kaylor has been using variations of the chart below to discuss income and inequality within the Portland region. Christian has done very interesting, enlightening, and depressing work along these lines. I am borrowing/stealing his concept to show regional disparities for household incomes on the City of Portland’s westside — everything west of the Willamette River — and in East Portland — basically everything east of 82nd but including the airport and surrounding industrial land. When you layer on multiple issues like housing affordability, displacement, job polarization and the like, you can end up with situations like the following where there has been no real income gains in some neighborhoods within an otherwise thriving regional economy.

Unfortunately these geographic disparities are not limited to the City of Portland as we all know. This was one issue that recently came up regarding the Opportunity Zones that came out of the federal tax reform. Business Oregon put together a really good interactive map showing which part of Oregon qualified for such a designation. As seen in the screenshot below, these potential Opportunity Zones are everywhere, including both rural and urban parts of the data. Furthermore, DHS regularly tracks so-called poverty hotspots which are census tracts with very high rates of poverty year-after-year.

Bottom Line: The economic recovery and expansion is reaching all corners of the Oregon economy. However many economic disparities remain. The gaps seen in employment and income for Oregon’s different racial and ethnic groups do not seem to be widening, but they are also not getting better. It’s a glass a quarter full vs three quarters empty situation. Geographic disparities on the other hand have widened this cycle both across and within regions of the state.

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Posted by: Josh Lehner | April 18, 2018

Apartment Demographics and the Outlook

This morning I am presenting at the Spring 2018 Multifamily NW Apartment Report event. The big picture takeaway from the Portland rental market is something like the following. The continued supply of new apartments is beginning to result in a rising vacancy rate, and the flattening of rents. In fact 7 of the 20 submarkets covered in the report saw rents decline. For renters and the overall economy, this is a welcome respite from the affordability problems in the past decade. When coupled with ongoing household income gains, it means housing affordability is set to improve in the coming years.

However, this market reality, when combined with rising interest rates and slowing economic growth, is potentially a cause for concern for some developers, lenders, and property owners. It depends upon the financing and assumptions upon which their projects were built, or in some cases still being built. There is likely to be some near-term adjustments, or even financial pain, particularly for the buildings still being built and for some of the apartments built this cycle as they begin to come due for refinancing. These trends and issues are always part of the development cycle, and it looks like we are now there.

With this backdrop, my brief remarks touch on Portland’s transformational growth in the past decade, but primarily focus on medium- and long-run expectations for population growth. This catch-up in the supply of new apartments is beneficial in the near-term sense as it helps with affordability, and over the coming years it also means there will be units for new residents to move into. Here in Oregon, one of our key comparative advantages is our ability to attract and retain, young, skilled households. While this is a huge boon to the regional economy, it also means population growth is our biggest risk to the outlook. Should migration dry up for any reason — be it a poor economy, or the lack of housing affordability — our longer-run forecasts would be revised lower. Given the fact that the natural increase of population will turn negative in a decade, we are even more reliant upon migration than in decades past. For now, the expectation is for a continued influx of new residents each year. As the economy transitions down to more sustainable rates of growth overall, so too will population gains.

While the immediate future will most likely show more apartments delivered than can be immediately filled with residents, over the medium term this does not appear to be much of a concern. Population forecasts expect that over the next 5 years, the Portland region will welcome nearly 6,000 new residents each year between the ages of 20 and 34 years old, the core apartment demographics. Households in their early- and mid-20s rent about 80% of the time. Gains the following 5 years will be slower, but still a bit more than 4,000 new residents in this demographic. Keep in mind by new residents I mean overall increases in this age group. It is a combination of migrants moving to the area, but also current residents aging into and out of different age groups.

When you take a look at projections for household formation across all age groups, it shows that the Portland area is expected to see healthy gains in the coming years. These projections are based on the population forecasts and the current rates of household formation and homeownership by age group. Given this, the majority of the household gains are expected to be owners now that we are past Peak Renter. Household finances and demographics are working in favor of ownership in recent years. That said, the biggest takeaway from this work is that there will be enough households in the future. Lack of housing demand is not the issue. The challenge is that the region will need to build considerably more than it already has if these population forecasts are reasonably accurate.

In terms of thinking about the risks to these projections, three stand out. First would be the business cycle. We know migration slows during recessions and people hunker down and move less. Given expectations already are for slowing population gains, a recession scenario relative to the baseline would show household increases that are maybe 10% less than baseline over the next 5 years, and a smaller decline over 10 years. Somewhat similarly would be the second risk of not building enough housing overall. This scenario would result in worsening affordability which would slow or even choke off population growth, proving these projections optimistic. This scenario would also lead to more displacement as only higher-income households could afford to move to the region. The third big risk to these projections is the owner-renter split itself. As mentioned above, it is based on the current market, and current homeownership rates by age group. If the region does not build enough ownership product, then more households will continue to be renters even they have the resources and desire to be owners.

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Posted by: Josh Lehner | April 17, 2018

Tax Day 2018

Happy personal income tax filing deadline day everyone! I know that doesn’t have quite the same ring to it as a real holiday or big event and you aren’t nearly as excited about it as we are. However Oregon is a personal income tax state; they make up 88% of the General Fund this biennium. Besides providing the bulk of state resources, tax returns also produce a wealth of data about Oregon households. This includes the basics about the number of taxpaying households, the sources of income, the growth of different types of income, and even migration patterns. But tax returns also produce more detailed data you cannot get from any other source, this includes things like usage (and amounts) for the various credits and deductions which can help policymakers evaluate, well, policy. Tax returns are also our only real source of information on capital gains, which swing wildly over the business cycle. So with all of this in mind, on this Tax Day 2018, let’s take a look at a few pieces of information that tax returns provide.

First, let’s take a look at a breakdown of Oregon full year filers, that is taxpayers who lived in Oregon for the entire year. This is 2015 data, which is the most recent year for which complete data is readily available from the great personal income tax statistics report from our friends over in the Department of Revenue’s Research Section. In the chart below you can see that just over half of taxpayers in Oregon – 52% – have adjusted gross incomes (AGI) of less than $40,000. In total, these 52% of households received 13% of all income that year, and paid 9% of all income taxes. On the opposite end of the spectrum, Oregon taxpayers with incomes above $250,000 accounted for 2.5% of all full year filers, they received 23% of all income, and given Oregon has some progressivity to its income tax, these households paid 30% of all income taxes.

It’s not just the total amount of income and taxes paid that matter, but also the components of income or the different types of income. In fact in our office’s forecast work, we look at and forecast these various types of income separately given they have varying trends and drivers of growth. This second chart shows big picture trends in the past decade or so and comes directly from the DOR research report. Here you can see both the trends over time and also the relative size of the income components. Wages are by far the largest source of income, and follow the labor market. Investment-related income, in particular capital gains, are the most volatile source due to asset market fluctuations and taxpayer behavior – the timing of when someone decides to sell. Retirement income fluctuates some, but is growing over time due to demographics and Baby Boomer retirements.

Finally, I wanted to highlight two more things. One, the California Legislative Analyst’s Office (LAO) just put out a visual guide to California’s tax system. To be honest, it’s a great report that illustrates many key facts and trends about public revenues, and includes links to more detailed analyses for those interested in more. Two, the sources of income for taxpayers in different income brackets matters considerably in understanding incomes, volatility, and taxes paid. Our last chart comes from the LAO report and show this breakdown for California taxpayers.

The combination of volatile revenue sources among the highest-income taxpayers, and some progressivity to income tax rates is what really drives the overall volatility of income tax revenues for the public sector. This, of course, is not entirely a bad outcome. There is a clear risk vs reward tradeoff between income taxes and sales taxes. Each has their benefits and their issues. In particular, what income taxes lose in stability, they gain in terms of equity (not being regressive) and also in avoiding the big tax base erosion problem that plagues general sales taxes.

Bottom Line: Don’t forget to file your return today to avoid penalties. And by doing do, you will also help provide our office more information on the state of Oregon taxpayers and what policymakers can expect in terms of available resources as we work on the next economic and revenue forecast.

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